Virtual Gold Mining for Nerds — the Rush is over already

After writing a post regarding the future prospects of the virtual currency known as BitCoin, I stumbled upon this fascinating little cult of people who call themselves “Bitcoin Miners”… and eventually got around to tinkering with some of the available programs out there that perform Bitcoin Mining.

An interesting aspect to the mathematical nature of BitCoin is that BitCoins do not exist until they’re “found”.   BitCoins are essentially very difficult-to-solve math problems that require heaps of computer processing power to solve.  Once the problems are solved, new BitCoins are created.  The nature of these math problems is such that it becomes increasingly difficult to find new, unique solutions to the math problems.

Essentially, to find BitCoins, people run software that churns away 24/7, processing hash encryption algorithms.  Eventually, the computer finds the right answer through trial-and-error, but it might take months or even years to completely solve just one problem.

In response to increasing rarity of new BitCoins, various groups, called “Mining Pools” were formed.  Since the problems require solving multi-part math problems, the mining pools found ways for participants to share their results in exchange for a reliable fraction of the final proceeds, ultimately making everyone more money.  Each CPU typically can process 1-2Million hashes (MHashes) every second.. and when pooled together, people found ways to make more money than they’d be able to do on their own.

Through these processes, more and more bitcoins were found, until, eventually, the CPUs on typical computers just couldn’t keep up anymore.  What next?  Well… some geniuses found ways to use the GPUs (the gaming graphics chip) on your computer to process the algorithms much faster than your CPU can.  My Geforce 650 is capable of processing 60 Million Hashes per second, compared to just 1-2 million/sec on the CPU, making it hundreds of times faster than the CPU.  Quickly, the miners all jumped on the bandwagon, pooled their findings, and more and more BitCoins were found.

Through this process, the difficulty level of the calculations has risen dramatically. There’s even a website dedicated to tracking the BitCoin difficulty level.

One look at www.bitcoindifficulty.com and you’ll quickly observe that it is skyrocketing out of control…  and, as a result, most miners can’t find enough Bitcoins to pay for the electricity required to find them.

So if GPUs can’t find bitcoins fast enough anymore, what’s next?  Well… apparently, ASIC processors are the new thing, and companies are selling them for big bucks, specifically marketed towards BitCoin miners.  Over at HashFast.com, you can get yourself a system capable of computing 1.2 “Terahashes per second”.  That’s 20,000X what my GPU was processing, and just as importantly, it consumes far less electricity than 20,000GPUs would consume.  The cost?  Just $7080.00.

There are a couple of basic, common-sense rules you can apply to decide for yourself as to whether it is worth it to pay $7000 to “invest” in BitCoin mining.

Common Sense Rule #1 – Since BitCoin mining only rewards those who are at the head of the pack, by the time you feel the need to jump on the bandwagon, it is already too late.

Common Sense Rule #2 – If these machines could give anyone a competitive advantage in the BitCoin mining game, why wouldn’t the company just keep them for themselves instead of marketing them to average dupes?  Competitive advantage is everything in BitCoin mining… and if they were really capable of making a secret weapon, why wouldn’t they just use it rather than sell it?

You can track my performance in the pool here.  As of this writing, I think I’ve made the equivalent of $0.05 over the course of the weekend, however, the pool won’t let me actually take this money until I make about 0.17BTC (approx $20).  They even offer up a handy estimator telling me that it will take me around 17 months to earn this money.

One trick that the companies marketing these devices are employing to make their products look like good deals, is they’re pushing the “preorders” pretty heavy.   Having a 1,200Gigahash computation rate seems like a lot right now, but by the time the devices are actually available for sale by the end of the year, the BitCoin difficulty will have skyrocketed to the point where these devices aren’t profitable.   If I had a 1.2Thash/sec device right now, it would be earning me $7,665.38 per month… this month.  Next month, it’ll likely earn me half that, and the following month half that again.  But it would make me a pretty penny and profit around $9581 over its cost .

There are handy calculators out there that will estimate the profitability of your mining device.  Check out this one. Plug in a value of 1,200,000 for the hash rate and it’ll give you an estimate of your potential earnings according to the current difficulty level.   However, guesstimate what the difficulty level will be by the end of the year and plug it into the calculator… not so hot is it? By the end of the year, when HashFast’s 1,200Ghash/sec device finally ships, I estimate the device will likely only be capable of earning (ballpark) $2160 by the end of the year.  I imagine the QA department over there is “testing” them right now and will decide that they’ll be ready once they’ve already milked the cows for all they’re worth. Pre-ordering such a device is a volatile idea.  If you get your device a week later than expected, your profits will probably have disappeared.  I’m going to guess that the 1.2THash devices from HashFast.com will actually only gross about $4300, and you’ll end up losing almost $3000 if you buy one.  They offer a “miner protection program” promising to quadruple your device’s power if you don’t make your money back in 90 days, however, 90 days after you get this device, you’ll actually need 8x the power to gross the same amount of bitcoin.

The yield for any bitcoin device will likely always be slightly under 2X its first month’s yield. Take any number, for example the number “100”.  Add half of itself to it… so +50.  Then add half that +25… Continue doing this over and over until you reach 200 and you’ll be adding numbers after you’re dead.  The number will never reach 200.  It’ll keep hovering around 199.999999 until the end of time.   So if we do the math and you get a 1.2Thash “Sierra” device from Hashfast.com.  Your first 3 months earns $4311… so they send you 3 month (overnight shipping) quadrupling your capacity and you run them for 90 more days…

1st Device Month 1 estimate: $2160
1st Device Month 2 estimate: $1080
1st Device Month 3 estimate: $540
4 Devices Month 1: $270×4 = $1080
4 Devices Month 2: $135×4 = $540
4 Devices Month 3: $77.50×4 = $270 (devices are now more expensive to operate than their electricity)
Total Gross Earnings = $5670
Amount to paid for the device (with their miner protection program) = $12,480
Your Loss = $6810

It seems that the miners are fed up with the rapidly increasing difficulty of Bitcoin mining and many are giving up.  Some have taken the Bitcoin source code and created new currencies already just so they can continue mining.   LiteCoin is basically a BitCoin clone and claims that, by changing the hashing algorithm, ASIC chips shouldn’t have as much of a competitive advantage over traditional CPUs in mining operations.

Unfortunately, LiteCoin is accepted nowhere and worth basically nothing and makes no promises to its future value, as opposed to BitCoin, which is accepted almost nowhere and worth currently around $130 USD, for now.